ValuePickr Forum

Kaveri seeds company limited -- kscl

kscl is co involved in business which is very result oriented.

1] suppose uprovidequality seed for 1 year then farmers will ask for same product for next year andneighbors to that farmer will also ask for same product if quality is good.

2] in agri market once you r able to create brand then only co will getpricingpower other wise you have to give highercommissionto middel men.

last 5 yeras sales glowth show thatdefinitelythey have good quality of seed. and co have went through above 2 phase.

There are lot of people who have liked the results of this company, but are afraid to take position, Reason being the current draught situation, Answer to that is one should try to understand the business model of this company,

If i am a farmer and i have a particular piece of land bank, i buy seeds for the cultivation of crop, now as due to draught situation or by any other means my crop gets damaged, Still for cultivation or replacement of current crop, i have to buy seeds.

And looking at the monsoon in western Maharashtra , specially KONKAN AREA where i own some part of land, The ground survey with farmers say, after 7-8 yrs, This time we are growing a NO.1 quality crop.

Also further to add…The draught is blown out of proportion and so is our rating downgrade.

Fully agree with DOC…Under current atmosphere, this looks to be the No.1 Pick to invest as of now.

Some links to read:

1.http://swaminomics.org/?p=2209 Draught not a big calamity any more

2.http://www.cnbc.com/id/48695940Impact of JUNK rated INDIA is not as bad as it LOOKS.

On Friday a parliamentary committee under CPM MP Acharya has come out with a report against BT seeds after a long research. ?

Should be studied for any implications .

Maharashtra govt has cancelled the license of Mahyco for non disclosure on availability of BT cotton seeds to its agricultural officers.

Could the superb results of Kaveri hv something to do with some one time benefit ?is it sustainable ?

Does the banning of BT cotton by Mahyco opens up the opportunity for Kaveri or could it be the next company to file foul of state govts. Where does It stands in terms of pecking order amonst seed cos in India ? I think Mahyco is the biggest followed by Advanta.

The co was founded by Mr Bhaskara Rao in 1976 . Is the co a one man shown lines of Dhirendra kumar of Camson Bio? Has the co professionalized it’s working ? How good is the 2nd generation of the promoter family?

Also views are invited on the Report generated by parl committee of basudeb acharya calling for banning BT seeds.

The report mentions specifically BT Brinjals seeds. Kaveri does not seem to have a significant presence in the brinjal BT seeds space.

Regarding the call by CMP MP ACHARYA calling for banning BT seeds (here also one has to read BT brinjal seeds) what is the kind of standing this MP has among the decision makers?

Just to cite an example of the efficacy of BT seeds specifically in cotton crop, following statement was there while searching for the things you mentioned:

In 2002, Bt cotton was the first GM crop introduced for commercial cultivation. Since its introduction, the countryâs cotton production has increased from 12-13 million bale (170 kg in a bale) in the 1990s to around 35 million bale at present. This has made India the second biggest cotton producer in the world surpassing the United States.

This goes to show the efficacy of BT Cotton seeds which has been the biggest growth driver for kaveri.

I think one needs to look into the stories you mention in details or ignore them altogether. No use being half informed by half baked stories.

These kind of things tend to scare you off good investment opportunities.

A lot of people I have come across in investment circles are trying hard to scare themselves out of great invesetment themes citing various reasons and half baked stories(like the one mentioned above). The same guys then ask the investment worthiness of the stock after the stock has gone up by around 20-50% and at times two to three bagger from the original levels.

The Ban on Mahyco came into effect as several farmers had made complaints, that inspite of advance payment to the company, they were not supplied the seeds, The complaints were been made since last 2-3 years, The Company also did not provide its seed distribution program for the current year and were selling / supplying seeds at a premium to some districts.

Hitesh,

Pardon my ignorance,does the introduction of GM crops affect the use of agrochemicals and how it affects companies like PI and Rallis,would they have to alter their business plans etc

Hi hitesh,

I agree with your analysis that it’s a strong buy after superb results.I think company growing at more than 25 per cagr should be valued at 15-20 pe.But some factors like Low tax provision,Low dividend distribution,regulatory controls,seasonalitymight denting valuations.Previously i approached company with few queries about taxation and div dist they replied that agriculture income in our country don’t attract tax and for low div dist they assign reason to huge capital expenditure committed regOleo cultureand floriculture projects.I did’t noticed any seasonality in kaveri pl account from fy 01 to till now.They are managing the company superbly.Promoters enhance their share from 60 per to 65 per.IDFC premier equity fund holds from ipo itself(8.86 per).Although i noticed huge inventories in annual balance sheet I totally underestimated the results(May be whole market).Although there are lot of good companies there is huge shortage of bt cotton seeds.I think mahyco,nugieedu,kaveri,raasi has good brand recall.Their office is very near to me and agm might conduct in sep last week.So we will get more clarity reg flori and oleoculture projects.they are constructing huge mega green houses for production and export of fine quality of vegetables.

for good understanding please go throuh these links

http://www.kaveriseeds.in/announcements.html

http://breport.myiris.com/ASBL/KAVSEECO_20101027.pdf

http://indiatoday.intoday.in/story/acute-shortage-of-bt-cotton-seeds-in-andhra-

pradesh/1/202206.html

http://www.business-standard.com/india/news/seed-companies-reap-rich-harvestbt-

cotton-wave/465532/

Companies like kaveri are working on drought resistant and disease resistant seeds. That should ideally reduce the demand for agrochemicals.

But one needs to understand that rice and wheat dont yet have any GM seeds being used. And thats I guess the area of max focus for agrochem companies.

At this stage when the use of hybrid seeds is in its infancy, one may not be too worried about agro chem demand.

omprakash,

thanks for the feedbacks and if u manage to attend the AGM it would be extremely interesting to have your feedback and maybe have a list of sharp questions for the management.

regarding tax i today talked with a CA friend who categorically stated that if the company itself develops the seeds in its own farms, it will be considered agricultural income and hence not taxed.

If the company does trading in seeds sales, i.e buying from some other company and selling to farmers it would be considered taxable income.

Essentially this concurs with what you have put up as management’s explanation for low tax rate.

and the two links of business standard and india today dont seem to be working.

regards

hitesh.

Here r the Links:

http://indiatoday.intoday.in/story/acute-shortage-of-bt-cotton-seeds-in-andhra-pradesh/1/202206.html

http://www.business-standard.com/india/news/seed-companies-reap-rich-harvestbt-cotton-wave/465532/

Definitely i will attend agm.Your explanation reg tax is perfect.Profit generated on trading iscertainlytaxable.But first of all we have to understand what is going on.Some companies have exclusive rights on BT seeds like Monsanto and Mahyco (Patents). Companies like kaveri , nugiveedu , Jk seeds source their technology and pay annual royalty.For ex else where i read that they pay rs 200-225 per bag.Kaveri seeds pay 23 cr as royalty in Fy 11.Kaveri has some 250 acres land and develop seed crops and sold directly to customers.So as their product generated as agriculture income they don’t pay taxes.They paid meagre 2-3 cr taxes on income on investments and others.I think the key monitorable risk is reg new technologies.But it’s long way to go.Good factor to enhance kaveri valuation is mega greenhouse like karuturi . the income from oleo and flori culture willcertainlyreduce seasonality and may boost up margins.

Omprakash, It would bewonderfulif you could also ask them if they are planning to changetheirdividend policy, and up the same? It would just make this tempting stock a bit more tempting!

Also I am a bit unclear about regulation in a politically sensitive business such as seeds, does the government regulate price of seeds? If not, have they tried to in the past? Does such a risk exist?

Also do they have any further expansion plans or are they covered for a couple of years? If they are planning to expand, is it going to come mostly from internal resources?

Thanks!

I will try and put up a list of questions which you can put up to the management and see if they are answered.

first and foremost is regarding the revenues from these olericulture and floriculture venture. When they expect them to trickle in and how much is the expected figures in next 2-3 years. plus what kind of margins do they expect in these products.

secondly you can ask about why the microtek division is not taking off? Is there lack of management focus or business itself is not amenable to big jump?

thirdly this year there was acute shortage of bt cotton seeds. Is it likely to be a one off blockbuster quarter for kaveri and then from next year back to the routine 25-30% growth? bcos from next year they will be growing on a higher base (due to almost doubling of profits and sales this year i.e fy 13)

and the other questions mentioned by vidur. regarding expansions, regulatory risks, and dividend payout policy.

have you received the fy 12 annual report? physical or soft copy either?

regards

hitesh.

Hi Vidur & Hitesh,

-Definitely there is regulation in seed pricing.Every year group of ministers met and decide the price of seed bag.Seeds sourced and supplied by govt was sold at approx 950 per bag.But in black it is more than 1500 depends on brand.Cartelisation is common.They influence the ministers and got good prices.

-Regarding dividend policy their intention to share the wealth is important.Not only me or any inst can question this.They attribute this one to capital exp.But this factor is very imp in enhancing valuations.But one imp factor to observe is first time there is positive cash flow and there is 100 cr cash in form of investments.So positive announcement reg any div will propel the price ex symphony.

-Reg microtek div, aries agro is way forward in AP.

-Reg results i’m also thinking on such lines.But every time i am under estimating the results.Not yet received AR.

-Although you might noticed this it’s worthwhile to look this.This may be the future.

‘The Company is laying emphasis on high value agriculture by way of protective cultivation of premium vegetables, herbs and ornamentals. With an exploratory built up of Mega green houses for Flori and Olericulture the Company is gearing up for export prospects. Plans are afoot to produce Gerbera, rose, **color capsicum, cucumber tomato, basil, chives, celery **etc. for export and domestic needs. If promising, the venture will be scaled up’

-Definitely i will try to understand the above aspects during interaction at the time of agm or before.

Thanks Omprakash, for responding and for offering to follow up with the management. To me you statement raises a big red flag, and even though I congratulate the Hiteshji for making such a wonderful pick again, and I am pretty sure the stock will well over a year or so. I am bit edgy on the longer term. This sounds more like the cement or sugar sector, underhand cartelisation, govt regulation (has bring so many industries to its knees). It raises questions on honesty and management integrity, which is like a double edged sword, because if you are honest, it is next to impossible to do well in any industry where the govt has a heavy hand. But if they follow that path sooner or later we all know how such companies disintegrate.

Any honest inputs on the management, and how they are dealing with such issues?

Wonderful results on Q1- What more investor’s needs , if growth is what everyone loves to rides. If growth is intact - we may have liberty to leave few trivial questions unanswered.

I agree with Hitesh Bhai- Its time to embrace the Growth story of wonderful business before activity starts here .

My intention reg cartelisation is not to show redflag on promoters or having any doubts on their integrity.Here i must say that they don’t has pricing power as it’s sensitive matter every year gom decides at what prices company should sell their products.B’cause in some seeds govt bears subsidy.So it’s common that they try to protect their interests.

Hitesh,

Thanks for prodding me again & again to look at Kaveri:)

Here’s some quick questions, that come to mind. Tomorrow I will do some reading up/research of my own. As I am a late entrant into the discussion, I want to first concentrate on the risks, and then the positives - mostly posed as top-of mind queries. Appreciate if you can bring me upto speed fast:)

RISKS

1). Over 50% of revenues come from BT cotton. I read this is licensed from Monsanto. How does the licensing relationship work. What prevents Monsanto from licensing Bt cotton - decide to go it alone in the Indian market (since the BT cotton growth is huge, I read)? How big a risk is this?

2). Royalty - how is it calculated? Can Monsanto raise it arbritarily?

3). What % of Sales is from licensed products, and in-house

4). How are the regulations in the seed sector? There might be price-capping? Is this statewise & arbitrary

5). How do we know for sure 2012 June Qr is not a one-off performance? What are the sources of this huge growth? Do we understand this properly?

6). Why will MNC players not kill a Kaveri Seed if it grows too fast? What kind of competitive pressures apply in this market

7). What is a good diversified seed product basket in India? How does Kaveri compare on that front?

8). if we look form 2007, there seems to be gradual operating margin erosions - from 28% in FY07 to 24% in FY11 - what are the reasons?

POSITIVES

1). Seed business may be a huge given the food situation globally and in INdia. Whats the total Indian market size? growing at what rate?

2). Valuation-wise -historically cheap at 10x, and potential for big re-rating if compared to Peers like Advanta, Monsanto. How’s the valuation compared to Indian seed companies

3). Is Kaveri the biggestIndianseed company. if not who’s the biggest and why?

1 Like

donald, coming to ur queries,

1 and 2 . regarding arrangement with monsanto, most of the indian seeds producers pay royalty to monsanto on a per bag basis. (that is what i recall having read somewhere) monsanto can raise it i guess but there must be some kind of business arrangement. Plus i think in india, the innovators do not have sufficient protection in terms of patent rights etc.

3). needs to be found out.

4). regulations are certainly there but govt wont want to play with production in crops so i guess it must be industry friendly.

5). june 12 being a one off quarter – that possibility has been highlighted by me earlier. but looking at consistency in growth plus some progress in rice hybrids by the company, one can expect this growth momentum to continue. But that bridge needs to be crossed after almost 9 months. What we expect is returns much before that.

6). regarding MNC players killing kaveri – i think kaveri has production and distribution network in place which might be difficult for any newly entering MNC to replicate all of a sudden.

7). Regarding a good seed basket in india, I have not too much idea bcos there are not many listed successful peers in Indian market. Some big players are there but they are not listed.

8). OPM margin erosions is probably explained by the growth of micronutrient business which still has to stabilise.

regarding bigger seeds companies in india, I think there are some unlisted players like nuziveedu etc based out of south who are really big. I think mahyco is also big and it has a tie up with monsanto also.

for size of seeds market etc, there are some details available in the last two years ARs.